Hong Kong companies providing services partly in Hong Kong and partly outside Hong Kong may be able to claim an exemption from Hong Kong profits tax for the part of the service income attributable to services rendered outside Hong Kong. The Inland Revenue Department (IRD) looks at the locality of services rendered to generate or derive such income when assessing offshore claims for tax planning purposes.

 

 

The first step in making an offshore claim is to identify the nature of the services provided and where they were performed. The IRD considers the following factors in determining the source of service income:

 

Place of performance of services: This refers to the physical location where the services are performed. If the services are performed wholly outside Hong Kong, the income arising from those services will be exempt from Hong Kong profits tax.

 

Place of negotiation and conclusion of contracts: This refers to the location where the contracts for the services are negotiated and concluded. If the contracts are negotiated and concluded wholly outside Hong Kong, the income arising from those services will be exempt from Hong Kong profits tax.

 

Place of payment for services: This refers to the location where the payment for the services is made. If the payment is made wholly outside Hong Kong, the income arising from those services will be exempt from Hong Kong profits tax.

 

Place of residence of the service provider: This refers to the location where the service provider is resident. If the service provider is resident wholly outside Hong Kong, the income arising from those services will be exempt from Hong Kong profits tax.

 

It is important to note that the above factors are not exhaustive and the IRD may consider other factors on a case-by-case basis.

 

To support an offshore claim, the Hong Kong company must maintain adequate records and evidence to demonstrate the locality of services rendered. This includes keeping records of the following:

 

1.      Place and duration of services performed

 

2.      Location of negotiations and conclusion of contracts

 

3.      Place of payment for services

 

4.      Place of residence of the service provider

 

5.      Any other relevant factors to support the offshore claim

 

It is also important for the Hong Kong company to ensure that the offshore claim is consistent with the substance of the transaction and not merely an artificial arrangement to avoid Hong Kong profits tax.

 

In conclusion, making offshore claims for tax planning purposes can be a complex process that requires careful consideration of the nature and location of the services provided. Hong Kong companies should seek professional advice and maintain adequate records to support their offshore claims.